The Federal Reserve

[Mathew Steel 151]

A few weeks ago, Charles asked me my opinion on The Federal Reserve. I replied, saying how I didn't know enough about it to comment. I decided to do some research, but the information seems to require a basic understanding of the government system in the US. It's very different to the way the UK works, and so, I was hoping that somebody could perhaps explain it to me. Or if not, refer me to some sites that I'll have a chance of grasping :P

[EaglePrince 234]

Well, it's not something that is specific only to United States. I would say that all countries work like that. Well, except North Korea maybe, or some other country in a similar state. :D

 

I'm not an economist, but as I understand it, countries need it to keep things stable... I haven't thought about it for a while, even though at some moment I felt like I understood it relatively well. Anyway, this is what I found at Wikipedia, and I think that this short list gives us the answers.

 

Purpose

 

• To address the problem of banking panics
  
• To serve as the central bank for the United States
  
• To strike a balance between private interests of banks and the centralized responsibility of government
  

1. 
   
2. To supervise and regulate banking institutions
   
3. To protect the credit rights of consumers
   

[*]To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of

• maximum employment
  
• stable prices, including prevention of either inflation or deflation
  
• moderate long-term interest rates
  

[*]To maintain the stability of the financial system and contain systemic risk in financial markets

[*]To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

• To facilitate the exchange of payments among regions
  
• To respond to local liquidity needs
  

[*]To strengthen U.S. standing in the world economy

Edited July 14, 2017 by EaglePrince

[Mathew Steel 151]

That's very helpful, Eagle! Thank you!?

 

I don't think I understand what a central bank does? Or how it works?

[EaglePrince 234]

By the way, this is where I got this list from.

https://en.wikipedia.org/wiki/Federal_Reserve_System

I keep receiving some error when I hit the Preview button, so I had to do it by editing the post several times...

 

As I understand it, the main purpose of the central bank is to control the countries currency, which is essential for its trade relations. I think it also dictates stuff such as interest rates, or exchange rates, so banks wouldn't be able to do basically whatever they want, and screw over entire country or its people intentionally or with their bad decisions. (I'm not sure about anything mentioned after interest rates though.)

 

Plasticly explained... A lot of that has to do with the fact that mostly companies and countries don't rely on cash, most of things are uncertain, and a lot of that works on trust. And if you want others to trust you, you need to have your reserves just in case... But when it comes to US in specific, as I got it, now it is much more based on trust and Tomahawks (at least so they say...), and the fact that USD is being used for trade with oil so it must not go down (petrodollar). This first part of this paragraph is about keeping the currency stable. And, the other part is that a country needs to be ready to clean up the mess of private banks.

 

EDIT:

https://en.wikipedia.org/wiki/Central_bank

A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,[1] which usually serves as the state's legal tender.

 

SECOND EDIT:

I'm just giving you some sources, but I do understand that there's a lot to read about this matter. I hope that I'm quoting enough so you don't actually need to read the rest of it.

 

But it's not that I understand the entire story. I just think that I understand the basic idea. Also, when it comes to this topic, while I do understand how currencies work, and why is that important (because that's what my country used to struggle with since the beginning of 90's), I know far less about interests. Mostly because I have learned from my father and my grandfather that it's simply the best to avoid taking any loans from a bank. Now that is the case even more over here, because many people here work for 200-300 euro, people worry that they could lose even those jobs because of high unemployment rate.

Edited July 14, 2017 by EaglePrince

[Lord_Chris 270]

@EaglePrince is absolutely spot on with his answers. The Federal Reserve is basically the equivalent of The Bank of England here in the UK and does a similar kind of job, just as the European Central Bank does for the European Union's Eurozone (But each country in the Eurozone also has its own Central Bank too).